China’s current Value Added Tax (VAT) system was established in 1994. In 2016, the Chinese government moved to make VAT the only indirect taxation system in the country by fully eliminating a legacy Business Tax (BT). However, the Chinese VAT system still has its own peculiarities and is regarded as one of the most complex VAT systems in the world.
General VAT System in China
In China, VAT is chargeable on the sale of goods, provision of processing and repair services, and the importation of goods. The standard VAT rate is 17%. Prices in China are normally quoted with the applicable VAT included.
All prices listed on the Shanghai Gold Exchange, Shanghai Futures Exchange, Dalian Commodity Exchange, and Zhenzhou Commodity Exchange are VAT-inclusive prices.
VAT is collected and submitted to the Chinese tax authorities by “VAT-liable entities”, which are defined as either General VAT taxpayers or Small-scale VAT taxpayers. General VAT taxpayers are large firms that meet certain threshold annual sales and have an ability to maintain an accounting system sophisticated enough to accurately calculate output VAT and input VAT. Small-scale VAT taxpayers are firms that don’t satisfy these criteria.
The formula for computing VAT payable to the Chinese tax authorities for a General VAT taxpayer is:
VAT payable = output VAT – input VAT
Output VAT = Current period taxable sales * Applicable VAT rate (e.g. 17%)
Input VAT = Current period costs of eligible purchases * Applicable VAT rate
From the perspective of an intermediary, such as a wholesaler which buys goods and then resells them, output VAT is charged by the wholesaler’s supplier and billed to the wholesaler, while input VAT is charged by the wholesaler to its downstream customers.
As with all VAT systems, VAT invoices are needed if offsetting output VAT against Input VAT.
In China, 4 types of receipts and invoices relevant to a discussion of VAT:
- Special VAT Invoice (SVI)
- Customs office special receipt for the payment of import VAT
- General VAT Invoice
- Shanghai Gold Exchange Invoice (SGE Invoice)
In order for Input VAT to be used as a tax credit offsetting Output VAT, Input VAT must be substantiated by a “Special VAT Invoice (SVI)” or “customs office special receipt for the payment of import VAT”. SVIs are issued when a General VAT taxpayer sells taxable goods and services. General VAT taxpayers cannot produce any VAT invoice of their own and must use official blank SVIs issued by the authorities. A Shanghai SVI looks like this:
Click to Enlarge – Exhibit 1, Special VAT invoice (SVI): 上海增值税专用发票 Shanghai SVI, 开票日期 Invoice issuance date, 购买方 Purchaser, 名称 Name, 纳税人识别号 Taxpayer code, 地址，电话 Address, telephone, 开户行及帐号 Bank & bank account number, 密码区 Secret code area, 货物，应税劳务及服务 Goods, taxable labour and services, 规格型号 Type, 单位 Unit, 数量 Quantity, 单价 Unit Price, 金额 Amount, 税率 VAT Rate, 税额 VAT amount, 合计 Total, 价税合计（大写）Sum of price and VAT (in traditional Chinese characters), 小写 In Arabic numbers, 销售方 Seller, 备注 Note, 收款人 Payee, 复核人 Double-checked by, 开票人 Invoice issuer.
When a Chinese company imports goods, it is required to pay VAT to the Chinese Customs Office. Customs will then issue a “customs office special receipt for the payment of import VAT” to the company which can be used as a VAT invoice.
A Shanghai General VAT invoice looks like this:
Click To Enlarge – Exhibit 2, General VAT invoice: 上海增值税普通发票 Shanghai general VAT invoice
The “Shanghai Gold Exchange Invoice (SGE Invoice)” is designed by the SGE under the supervision of the national tax authority.
VAT Policy on Gold In China
In China, authorities classify physical gold as either ‘Gold’, ‘Gold Products’ or ‘Gold Ore’.
The ‘Gold’ category refers to unwrought/unforged gold, such as gold bars gold and ingots (HS code 7108120000 and 7108200000) and can be sub-divided into Standard gold and Non-standard gold. Standard gold refers to gold bars or ingots having a fineness of 9999, 9995, 999 or 995, and a weight of 50 gram, 100 gram, 1 kg, 3 kg or 12.5 kg. The SGE and the Shanghai Futures Exchange (SHFE) only trade Standard gold. Non-standard gold includes any gold that does not satisfy Standard gold criteria, for example 200 gram gold ingots.
‘Gold Products’ refer to semi-finished gold and finished products of gold, such as gold coins, gold jewellery and gold ornaments.
‘Gold Ore’ is, as the name suggests, gold laden ore produced from mining.
For entities holding a gold import license from the Chinese central bank, Standard gold and Non-standard gold imported into the Chinese domestic market is VAT exempt.
Click to Enlarge – Exhibit 3: For gold products, the VAT rate depends on the exact gold products you sell or import, it can be different from 17 %.
If gold producers and gold traders (general VAT taxpayers and small scale VAT payers) sell Non-standard gold off the SGE (off-exchange), it is VAT exempt.
If gold producers and gold traders sell Standard gold off the SGE or the Shanghai Futures Exchange (off-exchange), a 17 % VAT tax rate will apply.
If Standard gold is sold on the SGE or the Shanghai Futures Exchange, it is VAT exempt. But the invoicing procedure is quite complex.
As an example, assume the following trades occur. ICBC imports 1 kilogram of Au99.99 (SGE 1 Kg 9999 gold ingot) – which is Standard gold – from Switzerland at a price of 230 CNY/gram (around 1,033 USD/oz). ICBC then sells this gold on the SGE at a price of 234 CNY/gram.
Guangdong-based gold jewellery manufacturer Shenzhen Batar buys this gold from ICBC, i.e. Shenzhen Batar is counterparty to the ICBC trade.
Shenzhen Batar then withdraws this gold from the Exchange, fabricates it into gold ornaments, and sells all of these gold ornaments to a retailer at a VAT-exclusive price of 300 CNY/gram. The VAT payable and receipts and invoices of different parties are as follows:
ICBC: When ICBC imports the gold, it receives a “customs office special receipt for the payment of import VAT”. On this receipt, the total VAT-exclusive amount for the gold is 230,000 CNY and the VAT is zero (ICBC’s Input VAT). This is because imported standard gold is VAT exempt. When ICBC sells the gold for 234 CNY/gram on the SGE, it needs to issue to the SGE a general VAT invoice, on which is recorded 234,000 CNY for the gold and 0 VAT (ICBC’s Output VAT). This is because selling Standard gold on the SGE is also exempt from VAT. Upon issuing the general VAT invoice, ICBC will receive an SGE invoice from the exchange.
ICBC VAT payable = Output VAT – Input VAT = 0 – 0 = 0
SGE: After ICBC and Shenzhen Batar have concluded their deal, the SGE will issue each of ICBC and Shenzhen Batar with an SGE invoice. After Shenzhen Batar withdraws the gold from the SGE vault, the Chinese tax authority will issue a SVI on behalf of the SGE, which the SGE distributes to Shenzhen Batar. On the SVI, the total VAT-exclusive amount for gold is 200,000 CNY and the amount of VAT is 34,000 CNY. The tax authority decides these two numbers using the following formula:
Total VAT-exclusive amount on the SVI = SGE transaction price * quantity / (1+17%) * 100 % = 234 * 1,000 / (1+17%) * 100% = 200,000 CNY
The VAT amount on the SVI = SGE transaction price * quantity / (1+17%) * 17 % = 234 * 1,000 /（1+17%）* 17 % = 34,000 CNY
To understand the reasoning behind this calculation, note that after withdrawing the metal, this standard gold leaves a VAT exempt environment (the SGE system) for an environment that is not exempt from VAT, and hence VAT is brought into existence.
In the scenario under which Shenzhen Batar doesn’t withdraw the gold from the SGE, the SGE invoice is the only invoice it will receive for accounting purposes – since Shenzhen Batar needs some evidence for accounting entries. If it withdraws the gold, then Shenzhen Batar will receive an SVI because the standard gold withdrawn can be manufactured into new gold products and sold off-SGE. Therefore, Shenzhen Batar will need to claim input VAT. General VAT taxpayers that withdraw from the SGE will receive a SVI, individuals that withdraw from the SGE will not. The input VAT noted on Shenzhen Batar’s SVI from the SGE is not an amount that Shenzhen Batar paid to ICBC as VAT, but Shenzhen Batar is allowed to deduct this amount from its output VAT.
Shenzhen Batar: After concluding the purchase of 1 kg 9999 gold on the SGE at the price of 234 CNY/gram, Shenzhen Batar receives an SGE invoice, and also an SVI after it withdraws the gold from the SGE. The input VAT is 34,000 CNY, which is described above. Shenzhen Batar then fabricates and sells all the gold ornaments made from the 1 kg of gold at the VAT-exclusive price of 300 CNY/gram. Therefore the output VAT is 51,000 CNY.
Output VAT = ornaments sales price * quantity * 17 % = 300 * 1,000 * 17 % = 51,000 CNY
VAT payable = Output VAT – Input VAT = 51,000 – 34, 000 = 17,000 CNY
Therefore, the VAT payable for Shenzhen Batar is 17,000 CNY. Since Shenzhen Batar has the SVI from the SGE, the Chinese tax authority will accept the 34,000 CNY input VAT as a tax credit to deduct from the output VAT.
References and Links
1.^ “An Overview of China’s VAT Reform”, China Breifing, December 2016 http://www.china-briefing.com/news/2016/12/30/overview-chinas-vat-reform.html
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